ATLANTA, GA — Addressing the CMD Group’s 5th Annual CEO Breakfast here, economist Bill Toal forecasted continued high volume in most construction market segments despite signs that a slowdown is commencing.

“Be happy,” he told the group, noting that with construction levels reaching new highs, a slowing still indicates a high level of activity.

As chief economist with the Portland Cement Association, Toal is a leading forecaster and analyst of construction activity in the United States. His background includes seven years with the Federal Reserve Bank in Atlanta, and he told the group that slowing in the industry is occurring as a direct result of the Fed’s increases in interest rates.

“The Fed is paranoid of inflation and looks constantly at economic indicators,” Toal said.

These indicators now show a slowing in economic activity and a slight increase in inflation. The producer price index is up, unemployment is the lowest it has been in 30 years, and labor shortages are occurring. Short- and long-term federal fund rates are now close together, another sign that the economy is slowing, stated Toal.

Overall, the forecast for the balance of the year is positive.

“On an annual basis for this year, we see the economy growing at almost 5%. This is the highest growth rate in 30 years,” said Toal. “If we have no growth for the rest of the year, we would still be growing 3% over last year.”

As far as what could go wrong, Toal said it could be a number of things. In this unprecedented 10th year of economic expansion, there is no pattern to follow. Consumer spending may end. The household savings rate is at 2.5% — the lowest it has been in 40 years. Consumer debt is at the highest level it has ever been.

Ballooning trade deficits and the stock market’s unrealistic price-earnings ratios are also concerns.

What's ahead

With the corporate debt-equity ratio the lowest it has been in 30 years, this bodes well for future commercial construction, noted Toal. But the residential market will not fare quite as well, he believes.

“I see declines ahead in residential construction, particularly single family,” he said. “We have starts dropping about 200,000 units; multi-family will turn up because basic population trends show that.”

For 2000, Toal forecasted 1.6 million housing starts, and 1.4 million for the next two years. He also expects residential improvement rates to rise 3% to 4% a year, since they generally go up slightly as the economy experiences a downturn.

Steady activity is predicted for non-residential construction. While the industrial and hotel segments will drop slightly, Toal said the education market will continue to be hot — the school age population is rising, and most U.S. schools were built before 1970. The office market also continues to be strong.

“Metropolitan vacancy rates were 25% in the late 80s, and they are 9% today,” he related.

Public construction has been increasing steadily since the early 80s, and Toal pointed out that state and local government budgets are posting surpluses of nearly $50 billion, meaning that, among other building programs, municipalities can now participate in more federal fund matching projects. An increase in funding for airport construction was also recently passed. For public construction, he forecasts a 3% increase this year.

Regional predictions

Looking regionally, the economist noted that some parts of the country will be booming while others are down.

“By region, most are growing in the residential segment from 2% to 4%, except New England,” he said. “The commercial hot spots are on the West Coast and in New York City.”

Conversely, he noted, parts of California, New York, and Texas are experiencing very high vacancy rates.

According to Toal, Georgia is outperforming the rest of the country on nearly all indicators. Hot spots for the state include multi-family residential, office, educational, institutional, public works, and airport construction.

Toal’s outlook is upbeat into 2001.

“Trends will flatten out, but we won’t see the declines of the late 80s,” he remarked. “There will be no major downturn, and given today’s levels of activity, that is very positive.”